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Date Created: 12/14/14
Econ 102 As you narrow a market goods become more elastic Notes Industrial organization is a branch of microeconomics that studies the different types of firm structures in an economy It studies how firms make production and pricing decisions One thing we assume about firms is that they are profit maximizers This means that they decisions that they make will be made in order to maximize the amount of profit that they receive We will talk about four different firm structures their characteristics how they decide on production and pricing and their economic efficiency The first one is perfect competition Three Characteristics 1 Many buyers and many sellers Meaning more than 50 different firms each with 2 or less of the market share Market share is the percentage of overall sales related to the other firms in the industry When a firm has little market share we say it has little market power A firm has market power when it has the ability to in uence the price in the market by changing their production In perfect competition there are so many firms that no single firm has any in uence on the price So we call these firms price takers 2 Homogenous products This makes each firm s goods perfect substitutes to each other So the demand curve of the firm faces is perfectly elastic 3 No barriers to entry If you want to get into the market you can When firms are enteringexiting we call this the short run Firms can make positive economic profits in the short run When firms have settled meaning no entering or exiting we call this the long run Economic pro ts in the long run equal zero in the long run if profits are positive gtgt firms enter gtgt profits decline if profits are negative gtgt firms exit gtgt profits rise Revenue Optimal decisions are made where At the margin Marginal Revenu the change in total revenue from an additional unit sold MR ATRAq